Conglomerate Merger

In the pursuit of growth, companies across the globe employ various types of mergers to strengthen their core operations, increase revenue, and enhance profitability. These mergers can be broadly categorized into three types:

1. Horizontal mergers occur when companies within the same industry with similar supplier and customer bases combine their operations.
2. Vertical mergers take place when companies at different stages of the same supply chain, such as suppliers or distributors, merge together.
3. Conglomerate mergers involve the combination of companies that operate in completely unrelated businesses.

What is Conglomerate Merger?

According to the European Non-Horizontal Merger guidelines, a conglomerate merger occurs between firms that are neither competitors in the same market (horizontal) nor suppliers or customers in a supply chain (vertical). Simply put, a conglomerate merger unites companies from entirely different industries, creating a diverse set of business interests. Such mergers allow companies to diversify their portfolio, spread risks, and enter new markets.

Types of Conglomerate Mergers: Pure vs. Mixed Strategy

Conglomerate mergers can be classified into two types – pure and mixed:

Pure Conglomerate Merger

A pure conglomerate merger occurs when two companies with completely unrelated business activities combine, without any direct interest or overlap in their operations, supply chains, or customer bases. These mergers are rare because they typically offer no immediate synergies in terms of product bundling or shared customers. Such mergers usually happen when a company, often a diversified conglomerate, has access to inexpensive capital and sees an opportunity to acquire an unrelated business that can be revitalized through restructuring and improved financial management. The acquiring company often acts as a holding company with a proven track record of effective capital allocation across a diverse range of businesses.

Examples of Pure Conglomerate Mergers

Berkshire Hathaway

Berkshire Hathaway is a prime example of a successful conglomerate that has repeatedly engaged in pure conglomerate mergers. Unlike other conglomerates, Berkshire Hathaway has maintained strong investor appeal by acquiring companies across a wide range of industries, including insurance, energy, railroads, real estate, industrial, retail, food and beverages. Its success is driven by a strategy of acquiring and managing diverse businesses, each contributing to its steady cash flow and overall growth.

List of Major Acquisitions by Berkshire Hathaway Over the Years

This image showcases a diverse portfolio of companies grouped under different industry categories.

Insurance: National Indemnity Company (1967), GEICO (1996), Gen Re (1998)

Utility and Energy: MidAmerican Energy Company (1999), NV Energy (2013)

Railroad: BNSF Railway (2010)

Real Estate: Clayton (2003)

Industrials: Marmon Holdings Inc. (2008), Lubrizol (2011), Precision Castparts Corp (2016)

Food: See’s Candies (1972), Dairy Queen (1997), Pampered Chef (2002)

To dive deeper into the complexities and advantages of conglomerate mergers, particularly through the lens of Berkshire Hathaway, explore the key lessons from Warren Buffett in the free downloads section. It draws directly from the insightful 2015 Berkshire Hathaway shareholder letters, providing a nuanced perspective on the enduring relevance of conglomerates.

General Electric (GE)

General Electric (GE) represents the other end of the conglomerate spectrum. While Berkshire Hathaway thrived through diversification into unrelated businesses, GE faced challenges. Once a champion of the diversified model under Jack Welch, GE underwent significant restructuring in 2021, splitting into three separate entities – Aerospace, Healthcare, and Energy. One notable pure conglomerate merger for GE was its 1985 acquisition of RCA, the owner of NBC, for $6.3bn. At the time, this was the largest non-oil merger in U.S. history. Through RCA, GE gained control over NBC, giving it a deeper entry into the media and broadcasting industry. However, by 2009, GE began to reduce its ownership in NBC, selling a stake to Comcast and fully exiting the business by 2013 to refocus on its core industrial operations and enhance profitability.

Mixed Conglomerate Merger

Mixed conglomerate mergers involve companies from different industries merging to extend their product lines or expand their market reach. Unlike pure conglomerate mergers, these mergers often offer opportunities for cross-selling or geographic expansion, leading to potential synergies.

Examples of Mixed Conglomerate Mergers

Merger of Citicorp and Travelers Group (1998)

This merger, valued at $140bn, was essentially a stock swap, with Travelers issuing 2.5 shares for each Citicorp share. This deal allowed Travelers to market mutual funds and insurance products to Citicorp’s retail customers, while Citicorp gained access to Travelers’ current customer base and future insurance buyers. However, by 2002, Citigroup opted for restructuring for strategic focus, simplification, and regulatory reasons, leading to the spin-off of Travelers Property & Casualty and the sale of Travelers Life & Annuity to MetLife.

Samsung’s Acquisition of Harman (2016)

Samsung acquired Harman for approximately $8bn in equity value to strengthen its presence in the rapidly growing connected technologies market, especially in automotive electronics. This strategic move was expected to capitalize on the automotive market’s growth potential, projected to exceed $100bn within a decade. Samsung aimed to leverage Harman’s audio capabilities and combine them with its consumer electronics expertise, enhancing user experiences across both its consumer and professional product lines.

These examples highlight the varying strategies and motivations behind pure and mixed conglomerate mergers, showing how companies use different merger types to achieve growth, diversification, and market expansion.

Conglomerate Merger vs. Horizontal Integration vs. Vertical Integration

What is a Major Reason for Conglomerate Mergers and What are its Benefits?

1. High ROI: Companies with access to cheap capital can acquire firms with low price-to-earnings (P/E) ratios but with high growth potential, creating significant value for the parent company when well executed.
2. Diversification: Merging with companies in different industries reduces risk and creates a more recession-proof business by balancing revenue streams.
3. Higher Market Power: Expanding into new industries can increase a company’s market presence and dominance.
4. Product & Technology Extension: Mergers can provide access to new products, services, or technologies that complement or enhance existing offerings.
5. Geographical Expansion: Mergers can help companies enter new markets, improve customer reach, and diversify geographically.
6. Management compensation: While it might seem cynical, there are instances where management decisions regarding mergers are influenced by personal incentives, such as increased compensation and heightened influence.

Conglomerate Merger Drawbacks

1. Lack of Focus: Diversifying into unrelated industries can dilute a company’s strategic focus and core competencies.
2. Lack of Expertise: Managing new lines of business may require expertise that the company lacks, leading to poor performance.
3. Conglomerate Discount: Investors may value a conglomerate lower than the sum of its parts due to perceived inefficiencies, leading to a “conglomerate discount” in stock valuation.
4. Cultural Differences: Merging companies from different industries may face challenges in integrating distinct corporate cultures, causing friction and inefficiencies.
5. Agency Cost: Management may pursue mergers for personal gain rather than value creation, which can harm the company in the long run.

What is Conglomerate Integration?

Conglomerate integration is the process of combining different companies into a single larger company. This involves bringing together their operations, management teams, and company cultures. For instance, a company that is into offline fast fashion buys an ecommerce company which deals in groceries. The goal is to combine the two companies and make them work together as one. This can be tricky because the companies might have different ways of doing things and different cultures.

Best Practices for New Conglomerate Mergers

To maximize the benefits of a conglomerate merger, organizations should implement industry-recognized best practices.

Conclusion

Conglomerate mergers provide opportunities for growth and diversification but come with challenges like integration complexities and cultural differences. Success relies on careful planning, clear goals, unified culture, and effective communication. With thoughtful execution, companies can unlock significant value and achieve strategic benefits from such mergers.

Additional Resources

M&A Explained

Merger Structures

How to Build a Merger Model

Different Types of Corporate Restructuring

Investment Banking Courses